Seasoned Funds and Paper Trails

We are well into the most popular season for home purchases. The good news is that qualifying for a mortgage has gotten easier but that is not the same as being "easy". There are still requirements that you must meet to obtain a loan and one of those is having seasoned funds and paper trails documenting your down payment.

Seasoned funds and paper trails may have been off the radar of many mortgage underwriters during the heyday of undocumented mortgage loans but seasoned funds and paper trails are being verified today. More than likely, a lack of seasoned funds and paper trails were a contributing factor in many of the loans that ended in foreclosure.

Understanding Seasoned Funds and Paper Trails

Seasoned funds are money that has been in your bank account for at least 60 days. The reasoning is that if the money is from a loan that you recently took out, within 60 days that loan will show up on your credit rating account. It can then be applied to the debt to income analysis that mortgage underwriters perform to determine if you qualify for a loan. Something else you want to consider is if anyone other than the names of the people applying for the mortgage are on the bank account the down payment money is coming from. If other people's names are on the account, the mortgage company probably won't consider the funds exclusively yours to be used for the down payment.

Seasoned funds and paper trails go together. Because saving for a large down payment can be tough, lenders want to know where the money came from - that's the paper trail. Traditional places the money comes from are tax refunds, gifts from family members, or taking cash out of a retirement account. Often, it's a combination of all of these and also you being diligent about saving money from your paycheck. You create the paper trail by keeping copies of the checks that you deposit into your down payment account. You'll find it difficult or impossible to get the IRS to send you a copy of the refund check after you deposit it. You'll create a stronger paper trail if you take a copy of it at about the same time you deposit it in your account. You can resort to submitting a copy of your income tax form but that isn't as strong of paper trail.

It may be easier to go back to family and ask for a copy of the check they wrote to create a paper trail. When you need seasoned funds and paper trails for a down payment, you're best off when you set up a separate account for your down payment. Then you can show regular deposits that correspond to your paychecks being made into the down payment account.

When It's Not Seasoned Funds and Paper Trails

Cash deposits made shortly before applying for a loan can be problematic. Maybe part of your down payment strategy is taking a second job for a while. If the work pays in cash and is under the table, it's not considered documented income and most lenders won't count it towards your down payment. Same thing if you sell a major asset such as a motor home for cash. You might get away showing a bill of sale or a copy of the title being transferred but it creates a weaker paper trail than a check being deposited along with the title being transferred.

Sources of funds that often don't need to be seasoned include:

  • Regular payroll deductions going into your savings account. The last few deposits don't need to be seasoned when the lender can see a long pattern of regular deposits.
  • Retirement funds when you can show they came from an account in your name. Often you don't want to season these funds because IRS rules allow first time buyers to use these funds, penalty free, if the funds are used to purchase a home within 120 days of making the withdrawal.
  • Gifted funds when you can show a proper paper trail. It's not your paper trail the lender wants to see. It's the paper trail for the account the gifted funds came from. The lender wants to be sure that the gifter didn't take out a loan in your behalf that they are expecting you to repay. The lender wants to see the funds were seasoned in the gifter's account.

The bottom line is that there is more to it than only coming up with the down payment. You also must be able to show seasoned funds and paper trails.

By Wendy Patton

For more than 30 years, I've used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It's because of that fact and my personal success that I share the Sandwich Lease Option System with others.

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One Response to Seasoned Funds and Paper Trails

  • Jesse Mills says:

    Great article Wendy! Yes, seasoning (even on a lease option that closes 2 years down the road) is very important today. Underwriters WILL ask for proof you had the money in your account and if it just "showed up" there, was it from an eligible source and can it all be documented.
    Another thing they will look for and ask about are any "large deposits" which are typically anything over $500 in a month (or 25% of your gross monthly wages). If you can't explain these amounts, you can't use the funds. Again, like the example of selling a car, you would need to create a "bill of sale" and have the buyer and you sign it, date it and show the papertrail for it all for it to hopefully count.
    You CAN get into a home these days with as little as 3% down for most people or even 0 down for some BUT there are still many rules which have to be followed. It's good to work with an experienced Mortgage Consultant who knows the rules and how to get things done.

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